14 January 1993 Income Tax Severed Letter 9233465 - General Outline of Taxation of Corporation and Shareholder

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

923346
XXXXXXXXXX                                 A. Humenuk
                                           (613) 957-2134

January 14, 1993 Dear XXXXXXXXXX

We received your letter of October 26, 1992 concerning tax considerations relevant to individuals working in the transportation industry.

In your letter you described a situation where an unemployed truck driver had set up a corporation to provide professional truck driving services. You point out that one of the benefits to the clients seeking such services (primarily trucking companies) is that the client would not be liable for the various payroll taxes which are imposed on an employer by both the federal and provincial governments (since the client would not be considered to be the employer of the driver of the truck). You suggest that the individual who provides the service to the clients on behalf of the corporation may or may not be an employee of that corporation and that the individual would be entitled to deduct many business expenses which would not be available to him as an employee. You ask for our comments and income tax references which may be pertinent to such a situation.

We caution you that our comments can be of a very general nature only in that the tax implications may vary, as you will see from our comments below, depending on the specific facts and circumstances of a particular situation. Furthermore, since you did not specify any particular question on this topic, we are unsure of what type of information you are looking for. You will find more information on specific topics in the Department's wide variety of published information, such as the T2 Corporation's Guide and the Interpretation Bulletin series. If you need assistance in finding the appropriate information or if you have a specific enquiry, you may wish to contact the enquiries area of your local district taxation office.

The first issue to be considered is whether the truck driver is an employee or not (irrespective of who the employer is). This is a question of fact which can only be determined upon review of all relevant documentation and the terms and conditions under which an individual carries out the assigned tasks. Further information on this area can be obtained from the Source Deductions section of your local district taxation office. It should be noted that the use of a corporation as an intermediary between parties which would otherwise be considered employer and employee will result in the individual being considered an employee of the corporation rather than of the third party. Nevertheless, the client corporation may still be liable for the source deductions required in respect of the employment income earned if the client corporation pays the employee directly.

Other income tax considerations arise where an individual has incorporated in order to carry on a particular business. The corporation is required to file an income tax return (separate from that which is filed by the individual) which includes the income earned by that corporation and the individual continues to file his or her own return reporting any distributions of profit from that corporation as either employment income, dividends or other shareholder distributions under subsection 15(1) of the Act, depending on the nature of the distribution. In any event, the shareholder would not be entitled to a deduction in respect of any of the business expenses of that corporation.

In the case of a corporation which provides its services through an individual who owns, directly or indirectly, 10% or more of the issued shares of any class of that corporation or a related corporation, such a corporation may be considered to be carrying on a "personal services business" as defined in paragraph 125(7)(d) of the Act and thus, the shareholder would be considered to be an "incorporated employee". Where this is so, paragraph 18(1)(p) prevents the corporation from deducting any expense other than the salary or wages paid to that incorporated employee.

Please note that our comments are restricted to the implications in respect of income tax and the Canada Pension Plan (unemployment insurance coverage is generally not available to an employee who owns a more than 40% of the issued shares of the employer corporation). For the effect of an arrangement such as you describe on other federal or provincial programs (such as the payments required of employers in respect of Workman's Compensation or the Ontario Employer's Health Tax), please contact the appropriate government department. Please note as well that these comments are an expression of opinion only, based on the information contained in your letter and are not binding on this Department. You also raised the issue of the amount which can be deducted by an employee engaged in the transportation industry for unvouched meal expenses incurred while travelling outside the employee's home work location. Since this issue relates to the Department's administrative procedure in respect of unvouched meal expenses, we have forwarded a copy of your letter to the Assessment of Returns Directorate for their consideration and reply. If you wish, you may contact M. Demarais-Markham of the T1 Post Assessments Section of that Directorate at (613) 941-0367.

We trust our comments will be of assistance to you.

Yours truly,

J.A. Szeszycki for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

c.c. M. Demarais-Markham, T1 Post Assessing Section T1 Programs Division Assessment of Returns Directorate